The Cartel Project
Regulators and policy-makers in Australia now see serious cartel conduct as a ‘cancer on our economy' equivalent to the criminal theft of millions of dollars in each case. Serious cartel conduct is taken to refer to four collusive practices between competitors - price fixing, market sharing, output restriction and bid rigging. In the last five years criminalisation of serious cartel conduct has become bipartisan policy in Australia. This represents a massive shift in approach to regulatory enforcement, from civil financial penalties to criminal sanctions including jail. The research carried out in the Cartel Project will generate an interdisciplinary (legal, economic and sociological) empirically-based perspective on:
• the impetus and justification for the shift in policy to cartel criminalisation in Australia, including the interplay of domestic and international forces;
• the likely effects of cartel criminalisation in changing business behaviour in Australia and the approach taken to enforcement; and
• the comparative experience in relation to the policy, implementation and enforcement of cartel criminalisation in the United States and United Kingdom, and in relation to the decision not to criminalise in Sweden.
The researchers will use these empirical analyses to draw conclusions and make recommendations as to how a criminal regime for serious cartel conduct may be most effectively implemented and enforced. They will also use cartel criminalisation as a case study to derive broader theoretical insights into the nature and process of regulatory reform, and how criminal sanctions affect business compliance motivations and behaviours in general.
The official justifications for cartel criminalisation in Australia can be distilled into three basic propositions:
• criminal penalties, particularly jail time, are the most effective deterrent to would-be cartellists;
• by analogy with other ‘white collar' offences, serious cartel conduct is inherently ‘criminal' and hence warrants the sanctions, educative impact and stigma of the criminal law; and
• Australia lags behind in the international movement towards criminalisation and, in particular, behind its major trading partners that already have criminal penalties for serious cartel conduct.
This research will investigate and test each of these propositions with a view to better understanding the reasons for and purposes of criminalisation and contributing to its effective implementation both in Australia and abroad.
In relation to deterrence, regulation theory and empirical research demonstrate that calculations about the costs and benefits of compliance and non-compliance with the law are influenced by a complex range of factors beyond the risk of enforcement action by an official government enforcement agency and the prospect of any formal legal penalty. There is in fact no simple linear relationship in which objectively harsher penalties, such as imprisonment, necessarily lead to increased compliance or socially optimal deterrence. In economics too there is a debate about the effectiveness of different measures (principally fines vs imprisonment) in producing ‘optimal' deterrence.
In relation to its criminality, there is no reliable empirical evidence of Australian public opinion on cartel behaviour and whether it is seen as comparable to other criminal offences such as theft or fraud. Since cartel conduct, like many other types of business misconduct, hitherto has not been treated as a crime, there in fact may be no social consensus as to its moral characterisation, and whether to criminalise it. There is recent empirical evidence from the UK suggesting that members of the public do not instinctively regard price fixing as dishonest. On the other hand there is evidence of a shift in Western democracies towards greater punitiveness generally, and specifically in relation to corporate misconduct.
In relation to overseas experience, there has been a global movement towards tougher sanctions for serious cartel conduct including criminal penalties, led by US (and increasingly also by EC) antitrust authorities and supported by international organisations such as the OECD, since the late 1990s. However, several countries outside of the US that have legislated for criminal penalties for serious cartel conduct are encountering legal, practical and cultural difficulties in enforcement. There are also countries that have either examined criminalisation in-depth and decided not to criminalise, or even decriminalised in recent years.
In light of this, the proposed research represents an important and timely study of crucial facets of serious cartel conduct criminalisation yet to be explored in depth in Australia and other countries new to or still contemplating a criminal regime.
This research concerns a subject of real practical significance to Australia. The introduction of criminal sanctions for serious cartel conduct is portrayed by regulators and legislators as necessary to reduce the most serious forms of anti-competitive behaviour in Australian industry, and therefore a crucial next step in advancing the substantial economic and social benefits that competition policy brings. However, to date there has been limited critical debate about the justifications for criminalisation. Nor has there been in-depth empirical investigation as to whether criminalisation is in fact apt to achieve the purposes claimed, or how it should be implemented and enforced. This is despite the obvious complexities in designing and administering a new criminal regime for conduct that traditionally has not been seen as criminal, and in some quarters may still be seen as normal business conduct.
The scope of this project will fill these gaps with its in depth, multi-perspectival investigation of serious cartel conduct criminalisation at all levels of the policy-making, practical implementation and enforcement, and compliance process in Australia, and comparatively. The research looks backwards (understanding how serious cartel conduct criminalisation came to be policy and how businesses have responded to civil enforcement in the past), forwards (to predict future business compliance) and contemporaneously as the implementation and enforcement of a new criminal regime unfolds.
Now is the critical time to do this research just as Australia is criminalising serious cartel conduct. Doing this research now means that the researchers can do contemporaneous interviews with relevant actors, and take advantage of the rare opportunity to conduct a ‘natural experiment' into the impact of criminalisation on perceptions and behaviour. The research will allow us to establish the baseline of perceptions and behaviour at the point of criminalisation before any criminal cases are brought.
Doing this research now will also enable the researchers to make a substantive contribution to legal and practical issues arising in the early years, critical to the successful operation of the new criminal regime. Such issues will arise in connection with interpretation of the new law by judges and parties before the courts; use of the ACCC's existing powers in the criminal context as well as its new powers and the need for it to formulate relevant guidelines on such matters; the operation of the immunity policy given the differences in approach to immunity by the ACCC and DPP; difficulties raised by multi-jurisdictional cases including extradition; the development of sentencing guidelines; and the revision of the ACCC's enforcement policy and practices to reflect the addition of criminal sanctions to its armoury. The research conducted to date on the draft legislation has shown that these are difficult and, in many respects, controversial issues that will have significant practical implications for the business sector and its advisors, as well as the members of the ACCC, DPP and courts involved in administering the new regime.
The research carried out for the Cartel Project will also contribute to broader theoretical debates in Australia and internationally concerning the nature and impetus for regulatory reform and effective approaches to business regulation. This Project will provide insight into the political and social conditions in which regulatory reform criminalising a certain type of business conduct is motivated and justified. This analysis will inquire below the surface of the various utilitarian justifications for cartel criminalisation (to reduce economic harms of inflated prices and distortion of competition) to understand what serious cartel conduct criminalisation policy-making tells us about the moral and ideological values animating regulatory capitalism. In addition, the criminalisation of serious cartel conduct is just one example of a broader and increasingly significant debate in regulation and economics disciplines over how individuals and business organisations respond to law and regulatory enforcement. The proposed research will use cartel criminalisation as a contemporary case-study and natural experiment to help answer fundamental questions about what motivates and explains compliance with the law, as well as more policy-oriented questions about how best to punish and prevent corporate non-compliance.
The research undertaken for the Cartel Project is innovative in the unique combination of legal, sociological and economic expertise and documentary, qualitative and quantitative research methodologies that will be brought to bear on all aspects of cartel criminalisation. Economists, often using non-empirical economic modelling, have previously dominated research on compliance with competition law. It is rare to have a team that includes an economist (Round), criminologist-sociologist (Haines), regulation scholar (Parker) and lawyer (Beaton-Wells) all working together in competition law, especially in the Australian context. Australia (including through the work of the researchers) is globally recognised as a centre for the very best scholarship attempting to explain compliance with the law and the impact of regulatory enforcement using interdisciplinary combinations and robust empirical testing. This Project will use for the first time this interdisciplinary empirical approach to understand the impetus for, and formally test the impact of, criminalisation in economic regulation.
Research Approach
The approach to the Cartel Project has three inter-locking components:
• understanding the social, economic and political impetus and justification for cartel criminalisation in Australia, and deriving lessons about the nature and process of regulatory reform generally;
• testing the likely impact of cartel criminalisation on business behaviour in Australia and eliciting insights for the use of criminal sanctions in regulation generally; and
• comparing the experience with cartel criminalisation in the US, UK and Sweden and thereby enriching conclusions about the impetus for criminalisation in Australia, as well as informing the practical implementation of the criminal regime.
Component 1: The Impetus and Justification for Cartel Criminalisation in Australia
This component of the research investigate's the influence of national and international actors on historical and contemporary social, economic and political perceptions of serious cartel conduct and its criminalisation in Australia. The researchers are identifing and examining the contradictory and contested justifications for serious cartel conduct criminalisation, and investigating how and why relevant actors have appealed to these justifications in different contexts for different purposes.
The researchers are drawing on researcher Haines' recent ARC funded research into the ways in which economic, social and political context affects the perceptions of risk that drive regulatory reform, and also researcher Beaton-Wells' preliminary assessment of the levels of support by key stakeholders for criminalisation in Australia. Building on this work the researchers are analysing three main dimensions of risk posed by serious cartel conduct: the technical or economic risk of harm to competition caused by such conduct; the ‘socio-cultural' risk of harm to a society's ‘moral order' through what has been said to be the dishonest character of serious cartel conduct; and the political risk of not responding to the international movement for criminalisation and national impulses towards greater punitiveness.
Within this framework the researchers are investigating the extent to which public and business opinion support the ‘official' justifications for cartel criminalisation, and seek to understand the capacity of various actors to affect each others' perceptions of the economic, ‘moral' and political risks posed by serious cartel conduct. They are also investigating the ways in which Australian policy-makers are responding to the challenge of taking a strong enough stance on cartels while dealing with the tensions caused by business concerns about commercial realities, regulatory ‘over-deterrence' and the over-zealousness of a strong, independent regulator.
Component 2: The Likely Effects of Cartel Criminalisation on Compliance and Enforcement
Regulatory scholarship provides two major theoretical explanations for compliance with the law: fear of sanctions (deterrence) or positive commitment to compliance. Both theories have been used to justify why criminal penalties above and beyond civil financial penalties, are necessary and appropriate to prevent serious cartel conduct. The Cartel Project is to critically examine, empirically test, and predict what impact the criminalisation is likely to have on the behaviour of individual executives and businesses in Australia using hypotheses based on each of these theories.
The Project is seeking to ascertain the likely deterrence impact of criminal sanctions for serious cartel conduct by testing the perceptions of business people as to the likelihood and costs of being caught and criminally sanctioned and how such perceptions differ according to personal, organisational and industry factors in different situations, as well as testing the extent to which business people even turn their minds to such possibilities when engaging in serious cartel conduct.
The Project sets out to test whether criminalisation will influence behaviour by educating business people and the wider community as to the undesirability of such conduct, and developing or strengthening positive commitment to compliance. It investigates to what extent different groups of people already perceive serious cartel conduct as something that should be treated as criminal, and what impact this is likely to have on compliance.
A third, normative theory, responsive regulation says that people can be motivated by both rationally calculative thinking (deterrence) and normative commitments, and that the design and enforcement of regulation must activate both motivations at the same time to promote compliance. Acquiring criminal enforcement capacity in relation to serious cartel conduct will change the tools available to the ACCC and therefore how it is able to influence behaviour. The Project aims to investigate how the ACCC will change its overall enforcement style and strategy, and draw conclusions about how the ACCC should use its new powers to achieve greater compliance over the long-term.
Component 3: Comparative Overseas Experience
The researchers are aiming to deepen the insights into the impetus for and assist in maximising the effectiveness of cartel criminalisation in Australia by examining and drawing comparisons in relation to the policy, design, administration and enforcement of serious cartel conduct regulation in the UK, US and Sweden. This component of the research involves identifying the different options available and their different likely effects on compliance in terms of the scope and elements of the offence, investigatory powers, operation of immunity policy, relationship between regulatory and prosecutorial agencies, management of dual civil and criminal systems, mode of trial, presentation of evidence, and sentencing.
The US has been chosen because of its extensive history in the enforcement of a criminal regime against cartels and the leadership role it has played in ‘converting' other governments and competition agencies to criminalisation. It has a legal system and culture that is distinct in several significant ways from Australia, including a strong tradition of regarding antitrust behaviour as delinquent. Comparison with the US therefore raises issues of ‘transplantation' that are critical to assessment of the successful implementation and likely effectiveness of the Australian law.
The UK has been chosen because of its similarities to Australia in terms of legal system, economy, political structure and social profile generally, and the substantive content and system of adjudication in competition law specifically. There are, however, differences from Australia in the forces and process involved in the UK decision to criminalise, which will be explored. It is the only country to have incorporated the requirement for an intention of dishonesty in its cartel offence, an approach that was proposed by the Australian government but criticised by commentators and subsequently abandoned.
Sweden has been chosen because it has deliberated over whether to criminalise cartels in the context of the current international movement and decided not to do so having considered the same issues regarding the deterrence and criminality of serious cartel conduct that have been considered in Australia and elsewhere.
The findings of this component of the research will be useful to more general debates concerning the globalisation of law and legal styles and the global economic and political transformations underpinning such developments. There are questions as to whether developments in cartel enforcement over the last decade represent successful exportation of the American model (‘Americanisation'), internationalisation/harmonisation of legal policy and regulatory method, or an apparent convergence that in fact masks enduring and resilient national differences in legal culture and policy.
Research Methodology
The researchers are using four research methods that complement and support each other across all three components of the research: documentary analysis, in-depth qualitative interviews, quantitative surveys, and workshops.
Documentary Analysis
Analysis of a wide range of primary and secondary documentary sources lay's the groundwork for the researchers' investigation of the impetus and justification for criminalisation in Australia, enforcement practices and impact in Australia, and the comparative experience with both criminalisation and enforcement practice in the US, UK and Sweden.
In order to identify the impetus and justification for criminalisation, the researchers are reviewing documents in all four countries reflecting the views in relation to cartel criminalisation of the relevant regulatory authorities (eg in speeches and submissions); governments and other political parties (eg in parliamentary debate and media comment); the business sector (eg in submissions to government inquiries and media comment); the general public (eg in opinion polls); the media (eg in editorial opinion pieces); the academy and the profession (eg, in journal articles and conference papers); and the judiciary (in both judgments and extra-curial publications).
To facilitate comparisons between the legal regimes of the four jurisdictions, the researchers are examining the relevant legislation, extrinsic materials (for example, Parliamentary inquiries and law reform reports) and case law to understand the law governing cartel regulation and how it is interpreted and applied by the courts in each country.
The researchers are also identifying enforcement policy and practice in each of the four countries through analysis of regulatory and prosecution agencies' documentation as well as reported cases. A database of penalties imposed in cartel cases in Australia since 1974 compiled for the purposes of previous empirical research by researchers Beaton-Wells and Round is being updated, extended, and compared with similar databases in other countries.
Qualitative Interviews
After completing documentary analyses in each of the four countries, the researchers will conduct in-depth interviews to further investigate and clarify the role played by different actors in influencing policy and practice in relation to serious cartel conduct criminalisation in each country, and to identify enforcement practice and policy in each country. The researchers will conduct interviews with:
• Senior ACCC staff and their counterparts in each of the US, UK and Sweden in order to understand their perspective on the rationale for criminalisation, the impact on the regulator's role of the perceived attitudes of other stakeholders, the approach taken to enforcement under both civil and criminal regimes, and whether and how enforcement is anticipated to affect business behaviour, including the important role of immunity policy under a criminal regime.
• Members of each of the government (including key politicians and bureaucrats), the judiciary, independent prosecution agencies (where relevant), other regulatory agencies (eg ASIC; ATO), the business sector, the academy, the profession, and the media in each of the four countries.
In addition, with particular relevance to the objective of determining the effects of criminalisation on business behaviour, the researchers will be seeking to interview at least one individual who has been involved in each Australian cartel prosecution as a respondent or representative of a business respondent (whether or not they had penalties imposed on them personally) since 2004. Preparation for these interviews will include a detailed review of documents from court files and other sources in relation to each case. The interviews will be designed to elicit the interviewee's motivations for engaging in the conduct at the time, whether and how they calculated the costs and gains of non-compliance, whether they saw themselves as acting against societal and business norms, what might have stopped them, and what difference the prospect of criminal sanctions would have made to them.
This will update and substantially extend researcher Parker's previous interviews with individual and business respondents in four cartel cases between 1992 and 2004. There have already been 20 cases since then, and it is planned that the researchers will locate and interview at least 25 individuals by the end of the project. Since the conduct will have already been the subject of finalised enforcement proceedings, interviewees should be able to talk in depth about the conduct without fear of further action.
Quantitative Surveys
Two surveys will be conducted - a phone survey of a random national sample of the general public, and a self-completion survey (available on-line or in paper form) of a random sample of senior operational officers in Australian businesses sourced from a commercially available list.
Both groups will be asked a series of questions designed to find out what they know about serious cartel conduct and their views as to how it should be regulated and punished, particularly the appropriateness of criminal penalties. The survey will be designed as much as possible to be comparable with Stephan's 2007 survey of UK public opinion on price-fixing, and will be sensitive to the challenges in eliciting views on the morality or ‘seriousness' of conduct such as fraud, particularly where, as here, there is public awareness and understanding of the nature and effects of serious cartel conduct is likely to be limited.
The business persons' survey will include an additional element made up of a combination of questions and factorial vignettes aimed at testing business peoples' perceptions of deterrence in relation to sanctions of imprisonment, the moral stigma associated with criminal investigation and prosecution, and the impact of the ACCC's immunity policy that encourages whistle-blowing by cartel participants, compared with motivations for compliance and non-compliance, and other factors that are likely to affect compliance. This survey will build on and refine researcher Parker's previous survey research on large Australian business perceptions of compliance and deterrence and on Simpson's 2002 well-regarded deterrence research.
Workshop
The researchers will hold a workshop in 2011 in order to test and develop the research findings through discussion with academics, practitioners, regulators and others from Australia and overseas.
The Cartel Project aims to:
• generate awareness and understanding of the issues involved in this major policy change;
• inform current debates about the nature, process and effectiveness of regulatory reform generally, and about competition policy and business regulation particularly;
• provide important practical input to the implementation and enforcement of a criminal cartel regime, and the enforcement of competition law more generally; and
• contribute to the effectiveness ultimately of criminalisation in reducing serious cartel conduct in Australian industry.
Communication of project results
The researchers will publish the results of their research as stages in the project are completed through the Project website as well as in academic journals, news media and ultimately a book.